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INDETERMINACY AND PERIOD LENGTH UNDER BALANCED BUDGET RULES

Published online by Cambridge University Press:  28 February 2012

Alexis Anagnostopoulos
Affiliation:
State University of New York at Stony Brook
Chryssi Giannitsarou
Affiliation:
University of Cambridge and CEPR
Corresponding
E-mail address:

Abstract

We analyze the importance of the frequency of decision making for macroeconomic dynamics, in the context of a simple, well-known business cycle model with balanced budget rules. We explain how the frequency of decision making (period length) and the measurement unit of time (calibration frequency) differ and examine how local stability is affected by changes in the period length. We find that as the period grows longer, indeterminacy occurs less often. This may have significant quantitative implications: for the model at hand, there is a wide range of economically relevant labor tax rates (from 30% to 38%) for which the continuous-time model gives indeterminacy, whereas the discrete-time model has determinate dynamics.

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Copyright © Cambridge University Press 2012 

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